Rate of new projects slackens

Commercial property developers are adopting a cautious stance towards new developments, according to the latest Broll Report.

There was a marked slowdown in new projects in the past year, with a 44 percent year-on-year decline in the value of non-residential building plans passed, Broll said in its 2013/14 assessment of property trends in South Africa and other key African markets.

However, the slowdown should result in improved vacancies and rental trends.

Strengthening vacancy rates in the retail and industrial sectors suggested the market was moving up the property cycle, the report said.

Commercial property in South Africa recorded a total return of 15.3 percent last year, a slight improvement on the 15.1 percent return in 2012.

Broll said this reflected the success of the sector in controlling operating costs through effective property management interventions.

The short-term prospects for the commercial property sector would be largely dictated by its ability to contain operating costs, it stressed. The longer-term scenario would be determined by rapidly evolving business practices, online retail technologies and significant improvements in public transport infrastructure.

The report said there were relatively low vacancy rates in the industrial property sector, combined with robust demand, especially for hi-tech, modern premises.

In contrast, the retail sector displayed mixed results, depending on the location and type of property, with investors opting for opportunities linked to higher urban densities as well as outlets targeting the growing middle class.

It said the office market was experiencing relatively high vacancy rates, which was likely to be exacerbated by new developments coming on stream in the short to medium term.

The latest SA Property Owners Association (Sapoa) office vacancy survey revealed that the national office vacancy rate was 11 percent in the first quarter. This was 20 basis points lower than the previous quarter but 40 basis points higher than a year earlier.

Sapoa said the national office vacancy rate had essentially been moving sideways since June 2011 and the excess supply in the market was weighing on rental growth, which was only marginally positive in nominal terms but negative if adjusted for inflation.

Broll said the office sector remained under pressure for a range of macroeconomic and business factors, not least of which was weak growth in gross domestic product (GDP), but the prime nodes were forecast to perform well this year.

It added that the take-up of office space was firmly focused on premier and A-grade nodes that offered contemporary, green buildings.

Older, secondary nodes were lagging behind. They faced high vacancy levels, dragging the overall sector performance down as a result, it said.

The report said development tended to be restricted to high-demand nodes where developers felt risk was minimal. At the same time, redevelopment had emerged as a trend, because the supply of available zoned land had tightened.

Broll said there was currently about 20.7 million square metres of formal retail space in South Africa and 2 million square metres of space under construction or in the planning stages.

About 6 percent of that 2 million square metres was the Mall of Africa development in Midrand.

The R3.5 billion Mall of Africa is being developed by Atterbury Property Development and Attacq. The 116 000m² super-regional mall is scheduled to open in March 2016.

Broll listed a number of key retail trends to watch in the sector in the next year, including the increasing presence of global retailers in South Africa and their expansion into the rest of Africa.

Two other trends were the preference of certain large, national tenants for stand-alone retail stores to reduce utility costs and to avoid high common area costs; and the springing up of Chinese-owned malls across South Africa, especially as struggling retail centres were converted into value centres, which often hurt domestic competition.

The report said the industrial sector was underpinned by manufacturing but was increasingly being affected by the downturn in GDP growth, a slowdown in manufacturing output and rand weakness.

“While a weaker currency gives local manufacturers an opportunity to compete with imports, the sector’s poor performance in recent years, combined with softer demand from the euro zone means they often do not have the capacity to take advantage of it.

“Furthermore, a range of challenges negatively impacts South Africa’s ability to drive new industrial growth: continued fuel price increases, wildcat strikes, high and escalating input costs for electricity and labour, and a lack of skills are all key examples,” it said.

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